Thursday, July 10, 2014

A Grudging Nod to Austrian School Business Cycle Theory

By Jeff Deist

The Economist is often wrong about economics and world affairs. Worse still, it is almost uniformly tedious and overbearing in tone: its writers generally sound like exasperated parents having to explain for the hundredth timewhat everybody knows.

But here an Economist blogger gets one thing right, in a piece otherwise riddled with errors (everybody knows that Austrians are wrong about QE and hyperinflation, everybody knows that Austrians favor a dystopian, selfish world, etc).

The insight of Austrian economics that seemed pertinent to me is that credit cycles can be hugely destructive, as the credit often does not find its way into productive uses; just drive around Ireland and see the abandoned houses built a decade ago if you want an illustration. Before 2007, most economists seemed to think that credit didn’t matter, except when it caused inflation; that is clearly wrong.

Clearly the central bank apologists are getting nervous, and they should be. Even the high priestess of the US Fed iswarning that “Monetary policy faces significant limitations as a tool to promote financial stability.”

2 comments:

Hugo Salinas Price: “With regards to the social question in the world, in 1929 a Spanish thinker by the name of Ortega y Gasset wrote a book that really shook up the world titled, ‘The Revolt of the Masses.’ He was talking about the appearance on the world stage of new individuals.

He was writing about the growth of the population and the appearance of new individuals coming in to the mass of humanity. And these individuals evidently are (what he described as) ‘barbarians.’....

“They came too suddenly to be educated, and for the knowledge of how to keep the Western way of life alive. These (barbarian) people have increased (in numbers), and now they have taken over power (in the world).

So now we are in the hands of ‘barbarians.’ They have no idea of how our society came to be, and what is necessary to keep it going. They are fiddling with the controls: You might think of a monkey flying a 747 (airplane) -- they don’t have any idea what they are doing. And this is not going to end well with the barbarians at the controls.

The Business Cycle is one of investing, and its nascent entrance into its final phase, that is Kondratieff Winter, is seen in trade lower in European Financials, EUFN, on June 24, 2014, which is the result of a trade lower in the Euro, FXE, beginning in early May 2014, and its full entrance with the failure of credit, seen in Aggregate Credit, AGG, trading lower in value on July 1, 2014. Formerly, investment was the way of life; now disinvestment is the way of life.